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Did high debts distort loans and grants allocation to IDA countries?

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  • Silvia Marchesi
  • Alessandro Missale

Abstract

We examine the allocation of net loans, grants and net transfers to IDA countries over the period 1982-2008 focusing on the role of debt, and debt sustainability, in the decisions of multilateral and bilateral donors. We estimate a dynamic panel of 75 IDA and IDA-Blend countries for the period 1982-2008, where the sample includes 40 HIPC and a control group of other 35 low-income countries. Our results point to no evidence of defensive lending as opposed to strong evidence of defensive granting. A significant negative reaction of net loans to the debt ratio characterizes the decisions of both multilateral and bilateral creditors. The impact of lower loans on the budget of debtor countries was however accommodated through the transfers of other resources, in the form of conventional grants (on top of debt forgiveness). This result is consistent with a substitution of grants for loans and the new approach to debt sustainability but questions the efficiency and selectivity of the aid policy.

Suggested Citation

  • Silvia Marchesi & Alessandro Missale, 2012. "Did high debts distort loans and grants allocation to IDA countries?," Working Papers 226, University of Milano-Bicocca, Department of Economics, revised Aug 2012.
    • Handle: RePEc:mib:wpaper:226
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    2. Marin Ferry & Marc Raffinot, 2019. "Curse or Blessing? Has the Impact of Debt Relief Lived up to Expectations? A Review of the Effects of the Multilateral Debt Relief Initiatives for Low-Income Countries," Journal of Development Studies, Taylor & Francis Journals, vol. 55(9), pages 1867-1891, September.
    3. Anna Tykhonenko & Donnat Grégory, 2022. "Debt Relief: The Day After, Financing Low-Income Countries," Post-Print hal-04298772, HAL.
    4. Carter Patrick, 2013. "Does Foreign Aid Displace Domestic Taxation?," Journal of Globalization and Development, De Gruyter, vol. 4(1), pages 1-47, August.
    5. Yu Ri Kim, 2019. "Does aid for trade diversify the export structure of recipient countries?," The World Economy, Wiley Blackwell, vol. 42(9), pages 2684-2722, September.
    6. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, vol. 95(2), pages 393-397, May.

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    More about this item

    Keywords

    defensive lending; foreign aid; grants; highly indebted poor countries.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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